STANLEY 1997 ANNUAL REPORT
MANAGEMENT REPORT ON RESPONSIBILITY FOR FINANCIAL REPORTING
The management of The Stanley Works is responsible for the preparation,
integrity and objectivity of the accompanying financial statements. The
statements were prepared in accordance with generally accepted accounting
principles. Preparation of financial statements and related data involves our
best estimates and the use of judgment. Management also prepared the other
information in the Annual Report and is responsible for its accuracy and
consistency with the financial statements.
The company maintains a system of internal accounting controls which is
designed to provide reasonable assurance, at appropriate cost, as to the
reliability of financial records and the protection of assets. This system
includes monitoring by a staff of internal auditors. It is further
characterized by care in the selection of competent financial managers, by
organizational arrangements that provide for delegation of authority and
divisions of responsibility and by the dissemination of policies and procedures
throughout the company.
Management is also responsible for fostering a strong, ethical climate so
that the company's affairs are conducted according to the highest standards of
personal and business conduct. This responsibility is reflected in the
company's Business Conduct
Guidelines which are publicized throughout the organization. The company
has a long-established reputation of integrity in business conduct and
maintains a systematic program to assess compliance with these policies.
The adequacy of Stanley's internal accounting controls, the accounting
principles employed in its financial reporting and the scope of independent and
internal audits are reviewed by the Audit Committee of the Board of Directors,
consisting solely of outside directors. Both the independent auditors and our
internal auditors have unrestricted access to the Audit Committee, and they
meet with it periodically, with and without management present.
January 29, 1998
John M. Trani Theresa F. Yerkes
------------------------------ -------------------------------
John M. Trani Theresa F. Yerkes
Chairman and Vice President, Controller
Chief Executive Officer
- -------------------------------------------------------------------------------
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
The Shareholders
The Stanley Works
We have audited the accompanying consolidated balance sheets of The
Stanley Works and subsidiaries as of January 3, 1998 and December 28, 1996, and
the related consolidated statements of operations, changes in shareholders'
equity, and cash flows for each of the three fiscal years in the period ended
January 3, 1998. These financial statements are the responsibility of the
company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of The Stanley
Works and subsidiaries at January 3, 1998 and December 28, 1996, and the
consolidated results of their operations and their cash flows for each of the
three fiscal years in the period ended January 3, 1998, in conformity with
generally accepted accounting principles.
ERNST & YOUNG LLP
Hartford, Connecticut
January 29, 1998
21
SUMMARY OF SELECTED FINANCIAL INFORMATION
Millions of Dollars, (except per
share amounts) 1997(A) 1996(B) 1995(C) 1994 1993 1992 1991 1990
- -------------------------------------------------------------------------------------------------------------------------------
CONTINUING OPERATIONS(D)
Net sales $ 2,670 $ 2,671 $ 2,624 $ 2,511 $ 2,273 $ 2,196 $ 1,942 $ 1,956
Earnings (loss) (42) 97 59 125 93 98 97 106
Earnings (loss) per share(E)
Basic $ (.47) $ 1.09 $ .66 $ 1.40 $ 1.03 $ 1.07 $ 1.12 $ 1.26
Diluted $ (.47) $ 1.08 $ .66 $ 1.38 $ 1.01 $ 1.06 $ 1.11 $ 1.25
Percent of Net Sales:
Cost of sales 66.8% 67.2% 68.2% 67.1% 68.3% 66.8% 66.0% 65.3%
Selling, general and administrative 23.5% 22.8% 22.5% 22.3% 22.5% 24.0% 23.8% 23.7%
Interest-net .6% .8% 1.2% 1.2% 1.1% 1.2% 1.3% 1.3%
Other-net .8% .8% .5% 1.4% 1.6% .8% .8% 9%
Restructuring and asset write-offs 8.9% 1.8% 3.3% - - - - -
Earnings (loss) before income taxes (.7%) 6.5% 4.3% 8.0% 6.5% 7.2% 8.1% 8.8%
Earnings (loss) (1.6%) 3.6% 2.3% 5.0% 4.1% 4.5% 5.0% 5.4%
- -------------------------------------------------------------------------------------------------------------------------------
OTHER KEY INFORMATION
Total assets $ 1,759 $ 1,660 $ 1,670 $ 1,701 $ 1,577 $ 1,608 $ 1,548 $ 1,494
Long-term debt 284 343 391 387 377 438 397 398
Shareholders' equity $ 608 $ 780 $ 735 $ 744 $ 681 $ 696 $ 689 $ 679
Ratios:
Current ratio 1.6 2.4 2.4 2.1 2.1 2.4 2.4 2.6
Total debt to total capital 40.5% 31.7% 39.6% 39.2% 38.7% 40.1% 37.6% 38.7%
Income tax rate (125.4%) 44.4% 47.6% 37.9% 37.4% 37.9% 38.0% 38.4%
Return on average equity(D),(E) (6.0)% 12.8% 8.0% 17.6% 13.5% 14.1% 14.1% 15.8%
Common Stock Data:
Dividends per share $ .77 $ .73 $ .71 $ .69 $ .67 $ .64 $ .61 $ .57
Equity per share at year-end $ 6.85 $ 8.79 $ 8.28 $ 8.37 $ 7.62 $ 7.66 $ 7.61 $ 8.25
Market price--high 47 3/8 32 13/16 26 11/16 22 7/16 23 15/16 24 1/16 22 19 7/8
--low 28 23 5/8 17 13/16 17 7/16 18 15/16 16 1/4 13 13 5/16
(TABLE RESTUBBED FROM ABOVE)
Millions of Dollars, (except per
share amounts) 1989 1988 1987
- ----------------------------------------------------------------------
CONTINUING OPERATIONS(D)
Net sales $ 1,951 $ 1,888 $ 1,744
Earnings (loss) 117 102 96
Earnings (loss) per share(E)
Basic $ 1.35 $ 1.18 $ 1.11
Diluted $ 1.34 $ 1.18 $ 1.11
Percent of Net Sales:
Cost of sales 64.8% 65.6% 64.7%
Selling, general and administrative 23.0% 23.0% 23.4%
Interest-net 1.3% 1.7% 1.7%
Other-net 1.0% .6% .7%
Restructuring and asset write-offs - - -
Earnings (loss) before income taxes 9.9% 9.1% 9.5%
Earnings (loss) 6.0% 5.4% 5.5%
- ----------------------------------------------------------------------
OTHER KEY INFORMATION
Total assets $ 1,491 $ 1,405 $ 1,388
Long-term debt 416 339 354
Shareholders' equity $ 659 $ 684 $ 626
Ratios:
Current ratio 2.6 2.6 2.4
Total debt to total capital 39.6% 35.0% 40.9%
Income tax rate 39.6% 40.8% 41.7%
Return on average equity(D),(E) 17.3% 15.5%
Common Stock Data:
Dividends per share $ .51 $ .46 $ .41
Equity per share at year-end $ 7.66 $ 7.99 $ 7.30
Market price--high 19 5/8 15 5/8 18 5/16
--low 13 3/4 12 3/16 10 5/8
22
Millions of Dollars, (except per
share amounts) 1997(A) 1996(B) 1995(C) 1994 1993 1992 1991 1990
- -------------------------------------------------------------------------------------------------------------------------------
Average shares outstanding (in thousands)
Basic 89,470 89,152 89,043 89,550 89,871 91,405 86,532 84,384
Diluted 89,470 89,804 89,839 90,656 91,296 92,842 87,552 84,770
Other Information:
Earnings (loss) from continuing
operations $ (42) $ 97 $ 59 $ 125 $ 93 $ 98 $ 97 $ 106
Loss from discontinued operations - - - - - - - -
Cumulative effect of accounting change - - - - (9) - (12) -
- --------------------------------------------------------------------------------------------------------------------------------
Net earnings (loss) $ (42) $ 97 $ 59 $ 125 $ 84 $ 98 $ 85 $ 106
Net earnings (loss) per share(E)
Basic $ (.47) $ 1.09 $ .66 $ 1.40 $ .94 $ 1.07 $ .98 $ 1.26
Diluted $ (.47) $ 1.08 $ $ 1.38 $ .92 $ 1.06 $ .97 $ 1.25
.66
Average number of employees 18,377 18,903 19,784 19,445 18,988 18,650 17,420 17,784
Shareholders of record at end of year 18,503 17,823 16,919 17,599 20,018 20,661 21,297 22,045
- --------------------------------------------------------------------------------------------------------------------------------
Millions of Dollars, (except per
share amounts) 1989 1988 1987
- ----------------------------------------------------------------------
Average shares outstanding (in thousands)
Basic 86,756 86,217 86,714
Diluted 87,194 86,662 87,130
Other Information:
Earnings (loss) from continuing
operations $ 117 $ 102 $ 96
Loss from discontinued operations - - (10)
Cumulative effect of accounting change - (13)
- ---------------------------------------------------------------------------
Net earnings (loss) $ 117 $ 89 $ 86
Net earnings (loss) per share(E)
Basic $ 1.35 $ 1.03 $ 1.00
Diluted $ 1.34 $ 1.03 $ .99
Average number of employees 18,464 18,988 19,142
Shareholders of record at end of year 22,376 23,031 23,051
- ---------------------------------------------------------------------------
A Includes charges for restructuring and asset write-offs of $238.5 million,
or $2.00 per share, related transition costs of $71.0 million, or $.51 per
share, and a non-cash charge of $10.6 million, or $.07 per share, for a
stock option grant as specified in the company's employment contract with
its chief executive officer.
B Includes charges for restructuring and asset write-offs of $47.8 million,
or $.43 per share, related transition costs of $32.9 million, or $.23 per
share, and a non-cash charge of $7.6 million, or $.08 per share, for
elements of the company's employment contract with its chief executive
officer.
C Includes charges for restructuring and asset write-offs of $85.5 million,
or $.72 per share, and related transition costs of $9.5 million, or $.06
per share.
D Excluding the cumulative after-tax effect of accounting changes for
postemployment benefits of $8.5 million, or $.09 per share, in 1993;
postretirement benefits of $12.5 million, or $.14 per share, in 1991; and
income taxes of $13.1 million, or $.15 per share, in 1988.
E Earnings per share and return on average equity excluding restructuring
charges, asset write-offs, related transition costs and the charges related
to recruitment of a new chief executive officer would have been $2.11 per
share and 19.9% in 1997, $1.83 per share and 18.9% in 1996 and $1.45 per
share and 16.6% in 1995.
23
MANAGEMENT'S DISCUSSION AND ANALYSIS
RESULTS OF OPERATIONS
On July 18, 1997 the company announced a major initiative to deliver
sustained, profitable growth funded by the reallocation of resources. This
initiative and the company's prior restructuring program (called "4X4") have
resulted in restructuring charges and restructuring-related transition costs.
Restructuring charges include the severance associated with employment
reductions, write-downs of assets either disposed of or impaired as a result of
the initiatives or other business factors, environmental costs of remediating
facilities to be closed or vacated and other similar exit costs. The
restructuring-related transition costs are additional costs resulting from
these major initiatives that are classified as period operating expenses within
cost of sales or selling, general and administrative expense categories. These
include the costs of moving production equipment, operating duplicative
facilities while transferring production or distribution, consulting costs
incurred in planning and implementing changes and other types of costs that
have been incurred to facilitate the changes encompassed by the restructuring
initiatives. Management judgmentally determines which costs should be
classified as transition costs based on the criteria of whether the costs are
unusual in nature and are expected to cease when the transition activities
related to these initiatives end. Because the presence of restructuring charges
and transition costs makes it difficult to see the underlying trends within the
company's businesses, the company also presents its results on a pro forma or
"core" basis, which excludes these as well as other non-recurring charges
incurred in the period. The table provided with this discussion reconciles
reported results with pro forma core results and reflects the amount of
transition costs and non-recurring charges included in operating results.
SALES
Net sales in 1997 of $2,670 million were slightly lower than 1996 sales of
$2,671 million. The loss of sales from low-margin businesses that were divested
as part of restructuring activities reduced sales by $107 million or 4%. The
negative effects of pricing and foreign currency translation combined to reduce
sales by 2%. Volume from ongoing business grew 6% from last year. All of the
company's businesses achieved volume growth over the prior year with the
overall increase being led by gains in fastening products, doors and carpenters
tools. Strong performance was also achieved in the industrial and consumer
mechanics tools businesses. Generally strong markets in North America and
Europe provided the basis for the sales gains. Net sales increased 2% from 1995
to 1996 despite business and product line divestitures, primarily due to
strength in the fastening systems and doors businesses.
GROSS PROFIT
The company reported gross profit of $886 million in 1997, up $11 million
from 1996. Gross profit, as a percent of sales, increased to 33.2% from 32.8%
in 1996 and 31.8% in 1995. These improvements reflect manufacturing
efficiencies achieved from higher production volumes and the savings from
reduced material costs primarily resulting from the company's centralized
procurement activities. These gains were offset by price erosion, particularly
in the fastening and hardware businesses; the negative foreign currency
translation impact of a stronger dollar; and higher levels of
restructuring-related transition costs. Transition costs included in cost of
sales increased to $31 million in 1997 from $16 million in 1996 and $4 million
in 1995. In 1997 and 1996, these costs primarily related to the implementation
of demand flow manufacturing in several facilities and the plant
rationalization activities for the tools and fastening systems businesses
undertaken as part of the 4X4 initiative.
NET SALES ANALYSIS
1997 Net Sales Changes 1996 Net Sales Changes
Unit Aquis/ Unit Aquis/
1997 Price Volume Divest Currency 1996 Price Volume Divest Currency 1995
- -----------------------------------------------------------------------------------------------------------------------------------
Industry Segments
Tools
Consumer $ 754.0 - 6% (3)% (3)% $ 751.1 - 1% (1)% (1)% $ 756.5
Industrial 552.2 1% 3% (1)% - 538.7 3% (1)% (1)% - 534.7
Engineered 717.4 (1)% 7% 1% (2)% 686.4 - 5% (4)% - 678.3
- -----------------------------------------------------------------------------------------------------------------------------------
Total Tools 2,023.6 - 5% (1)% (2)% 1,976.2 1% 2% (2)% (1)% 1,969.5
Hardware 352.2 (2)% 6% - - 340.4 1% 4% - - 324.2
Specialty Hardware 293.7 (1)% 7% (23)% - 354.2 (2)% 8% 1% - 330.6
- -----------------------------------------------------------------------------------------------------------------------------------
Consolidated $2,669.5 (1)% 6% (4)% (1)% $2,670.8 - 3% (1)% - $2,624.3
- -----------------------------------------------------------------------------------------------------------------------------------
GEOGRAPHIC AREAS
United States $1,900.6 (1)% 5% (5)% - $1,911.5 - 3% (2)% - $1,884.9
Europe 423.6 (1)% 6% 1% (6)% 421.8 1% 2% 1% (2)% 413.4
Other Areas 345.3 1% 9% (5)% (3)% 337.5 1% 3% - - 326.0
- -----------------------------------------------------------------------------------------------------------------------------------
Consolidated $2,669.5 (1)% 6% (4)% (1)% $2,670.8 - 3% (1)% - $2,624.3
- -----------------------------------------------------------------------------------------------------------------------------------
24
In addition, in 1997 the company incurred $2 million in costs related to task
forces that were established for the facility rationalization and outsourcing
initiatives announced in July. Excluding transition costs, on a core basis,
gross profit margin as a percent of sales increased to 34.4% in 1997 from 33.4%
in 1996 and 32.0% in 1995.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses increased to $628 million in
1997 from $609 million in 1996 and $592 million in 1995. These expenses were
23.5% of sales in 1997, 22.8% in 1996 and 22.5% in 1995. The increases in
expense were primarily in distribution and administration. Distribution costs
were higher reflecting consulting expenses and duplicative facility costs
associated with the consolidation of North American order entry and
distribution. The increases in administrative expenses include consulting
expense for reorganization activities and the excess recruitment and relocation
costs associated with significant changes in senior management. In addition,
1997 includes approximately $11 million related to the 1997 announced
initiatives, primarily for consulting, contract labor and other temporary
resources used to plan and implement the administrative functional
consolidation. Total transition costs were $40 million in 1997, $17 million in
1996 and $5 million in 1995. On a core basis excluding these transition costs,
selling, general and administrative expenses would have been 22.0% of sales in
1997 as compared with 22.1% in 1996 and 22.4% in 1995.
INTEREST AND NON-OPERATING EXPENSES
Net interest expense (interest expense less interest income) was $17
million in 1997, $23 million in 1996 and $30 million in 1995. The decrease
between 1997 and 1996 reflected lower average debt levels, lower effective
borrowing rates and higher interest income. The decrease from 1995 to 1996 was
due to lower levels of borrowing and effective interest rates. Net other
expense (other non-operating expense less other non-operating income) was $22
million in both 1997 and 1996 and $14 million in 1995. Included in 1997 and
1996 are non-cash charges related to the recruitment of the company's chief
executive officer. These include an $11 million charge taken in the second
quarter of 1997 to reflect the value of stock options granted and $8 million in
1996 reflecting the value of stock rights awarded under the terms of a
three-year employment contract. Although both awards were granted in December
1996, recognition of the option value was required as of the date of
shareholder approval. Excluding those non-recurring charges, Other-net expense
on a core basis was $11 million in 1997 compared with $15 million in 1996 and
$14 million in 1995.
The company's effective tax rate was significantly affected by non-
deductible restructuring charges in 1997, 1996 and 1995 and by the non-
deductibility of the 1996 charges for CEO benefits. Excluding these charges
the effective rate would have been 37.5% in 1997 and 38% in both 1996 and 1995.
BUSINESS SEGMENT RESULTS
The following discussion on the company's business segment results is
presented on a pro forma or core basis. The discussion of core results is
intended to provide insight into the underlying business and marketplace
conditions that would otherwise be obscured by the increasing levels of
transition costs. The accompanying table reconciles reported results with core
results and indicates the amount of transition costs and restructuring charges
associated with each segment.
Net sales in the Tools segment increased 2%, with a 5% increase in ongoing
business volume offset by negative foreign currency translation. All businesses
reflected volume gains with particular strength noted in fastener tools and
fasteners. While there was no net effect of price changes, increases in the
industrial businesses offset the significant erosion experienced by the
fastening systems business which resulted from two factors. Highly engineered
fastening tools
OPERATING RESULTS: PRO FORMA COMPARATIVE ANALYSIS
Pro
1997 Pro Forma 1996 Forma
Restruct- Related Core Restruct- Related Core
uring Transition Pro Forma Profit uring Transition Pro Forma Profit
Reported Charges Costs* Core Margin Reported Charges Costs* Core Margin
- -----------------------------------------------------------------------------------------------------------------------------------
INDUSTRY SEGMENTS
Tools $ 61.1 $194.8 $ 51.9 $307.8 15.2% $ 196.6 $ 44.6 $ 24.1 $ 265.3 13.4%
Hardware 16.4 17.8 12.4 46.6 13.2% 42.4 - 4.4 46.8 13.7%
Specialty Hardware (12.3) 23.5 3.3 14.5 4.9% 12.2 0.3 2.3 14.8 4.2%
- -----------------------------------------------------------------------------------------------------------------------------------
Total 65.2 236.1 67.6 368.9 13.8% 251.2 44.9 30.8 326.9 12.2%
Net corporate (59.1) 2.4 14.0 (42.7) (48.9) 2.9 9.7 (36.3)
expenses
Interest expense (24.7) - - (24.7) (28.1) - - (28.1)
- -----------------------------------------------------------------------------------------------------------------------------------
Earnings (loss)
before
income taxes $ (18.6) $238.5 $ 81.6 $301.5 $ 174.2 $ 47.8 $ 40.5 $ 262.5
- -----------------------------------------------------------------------------------------------------------------------------------
GEOGRAPHIC AREAS
United States $ 83.1 $145.6 $ 53.4 $282.1 14.8% $ 212.5 $ 17.2 $ 26.2 $ 255.9 13.4%
Europe (18.5) 61.8 7.6 50.9 12.0% 24.8 17.1 2.5 44.4 10.5%
Other Areas 0.6 28.7 6.6 35.9 10.4% 13.9 10.6 2.1 26.6 7.9%
- -----------------------------------------------------------------------------------------------------------------------------------
Total $ 65.2 $236.1 $ 67.6 $368.9 13.8% $ 251.2 $ 44.9 $ 30.8 $ 326.9 12.2%
- -----------------------------------------------------------------------------------------------------------------------------------
*Included in Net corporate expenses is a charge of $10.6 million and $7.6
million for 1997 and 1996, respectively, for items specified in the company's
employment contract with its chief executive officer.
25
have historically been protected from low-cost foreign sourced competition due
to a market preference for a higher quality U.S. made product. The recent
availability of foreign sourced tools of an acceptable quality resulted in
significant pricing pressure for these products. In addition, a strategic price
reduction was implemented in Europe in response to marketplace conditions.
Despite this competitive pricing environment, core operating profits as a
percent of sales increased to 15.2% from 13.4% in 1996 and 11.4% in 1995 due to
manufacturing efficiencies from higher production volumes and cost savings
realized from restructuring initiatives, primarily the company's centralized
procurement activities.
Net sales in the Hardware segment were up 4% overall, despite a 2% decline
in price. Pricing in the U.S. was very competitive. Core operating profits were
13.2% of sales, down from 13.7% in 1996. Gains in productivity from volume and
restructuring activities, particularly in the Doors business, were more than
offset by lower profitability in the Hardware business resulting from the
transfer of its distribution to a new consolidated warehouse. Significant
start-up difficulties were encountered resulting in both lower volume and
higher freight cost. Most of these difficulties were overcome by the end of
1997. Core operating margins of 13.7% in 1996 improved significantly from the
8.5% margin reported in 1995 due to the absence of operational problems in the
Home Decor facility in France.
Net sales in the Specialty Hardware segment decreased 23% as a result of
the sale of the garage related products business in early 1997. Growth from
ongoing businesses in this segment was strong, with a net 6% increase. Core
operating margins were 4.9% of sales as compared with 4.2% in 1996 and 6.1% in
1995. The severe competitive pricing environment in the automated door products
market, which accounted for the decline in profitability experienced in 1996,
has stabilized and 1997 benefited from gains realized from several
restructuring initiatives.
GEOGRAPHIC RESULTS
Unit volume gains in sales were realized in all geographic areas. The US
and European economies were strong and provided a solid basis for growth.
Canada and Latin America both experienced double digit volume gains, however,
Asia experienced disappointing declines. Core operating profits were up in all
regions.
RESTRUCTURING ACTIVITIES
The company recorded restructuring charges and charges for the write-down
of impaired assets associated with its multiple restructuring initiatives of
$239 million in 1997, $48 million in 1996 and $86 million in 1995. The 1997
restructuring charge, approximately half of which is severance, is associated
with the comprehensive reallocation of resources announced in mid-1997. The
amount of the charge is net of $7 million in gains resulting from businesses
divested under the 4X4 restructuring initiative. The objective of the 1997
restructuring initiative is to deliver profitable sales growth on a sustained
basis. This growth, fueled by increased spending on new product development,
expansion into new ventures and brand development, will be funded by the
savings achieved from streamlining operations and reorganizing into a product
management structure. The company is transitioning from a portfolio company
with 11 fully independent businesses to a single operating entity.
Administrative functions such as finance, human resources and information
technology are being centralized. Manufacturing and distribution operations are
being rationalized. The company plans to reduce facilities: from 83
manufacturing plants to 45 and from 40 distribution centers to 25. The sales
organization has been reorganized to eliminate redundant coverage of key
customers and channels. Overall, these actions will change the composition of
the company's workforce and are expected to reduce net employment levels by
approximately 4,500 people.
The total costs anticipated to accomplish these initiatives are $340
million, of which $240 million are restructuring charges, recorded in 1997, and
$100 million are transition costs that will be included in operating earnings
through mid-1999. The restructuring is expected to yield approximately $145
million in annual savings all of which will be reinvested in new product
development, new ventures, brand development and other areas to stimulate
growth. Most of the 1997 initiative projects are targeted to be complete by
1999. Since several projects depend on achieving common systems, which has been
delayed due to year 2000 compliance efforts, it is possible that some of these
initiatives will not be completed until the end of 2000. However, the delay in
timing is not expected to seriously affect the anticipated results of the 1997
restructuring.
Restructuring charges recorded in 1996 and 1995 were associated with the
4X4 initiative. The goal of 4X4 was to reduce the company's cost structure by
$150 million (half of which was to be reinvested) and to reduce working capital
and other assets by $250 million by the end of 1997. The second objective of
that program was to achieve net sales of $4 billion in 1999. The company did
achieve the cost and asset reduction targets, however, the objectives for
revenue growth were not fully realized. Under that program, seven businesses
were divested; four product categories were exited; eleven manufacturing
plants, three distribution centers and two support facilities closed; and a
salaried workforce reduction occurred.
Reserves recorded for restructuring activities were $27 million at the
beginning of 1997. During 1997 payments of $28 million were made, primarily for
severance. Other than the restructuring charges recorded in 1997, no other
significant changes were made to the restructuring accruals, and the ending
balance in 1997 was $167 million of which $128 million related to severance,
$13 million to environmental costs of remediating facilities to be closed or
vacated and $26 million to other exit costs. Future cash outlays for severance
and other payments in any one year are not expected to materially affect the
company's liquidity.
26
FINANCIAL CONDITION
LIQUIDITY, SOURCES AND USES OF CAPITAL
Management has established aggressive growth plans as well as committed
the company to funding significant restructuring activities. The company's
historically strong cash generating ability, its ample debt capacity and its
access to equity markets provide substantial flexibility in meeting both its
routine operational needs and its growth and restructuring objectives. Cash
flow from operations in 1997 was $241 million, slightly less than in 1996 but
over 25% higher than the prior average ten year period. This operating cash
flow was used to reinvest in the business and to pay shareholder dividends.
Capital expenditures were higher than depreciation and amortization for
1997 due partially to the investment in the North American common distribution
and order entry system. Capital expenditures in 1998, other than expenditures
required for Year 2000 compliance, are expected to equal depreciation and
amortization charges of approximately $80 million.
Stanley has one of the longest records among industrial companies of
paying quarterly dividends to shareholders. The company's objective is to
increase dividends at the rate of one-half of the company's earnings growth
rate, ultimately reaching a dividend payout ratio (dividends divided by
earnings per share) of 25%. Dividends of $.77 per share paid in 1997
represented a 5% increase over 1996 dividends of $.73 per share.
The company's policy is to offset the dilutive impact of its employee
benefit programs (stock awards, options, etc.) through the purchase of shares
in the open market. The net activity related to the share repurchase programs
was to reduce equity by $45 million in 1997 and $29 million in 1996. This
activity has increased over the last several years as a result of increases in
the amount of options and other awards and the appreciated market price of the
stock. It is anticipated that this activity will continue at similar levels.
Business acquisition and divestiture activity during the year resulted in
a net $24 million cash outflow. As described in the restructuring program,
several businesses were sold, the largest of which was the garage related
products business in 1997. During 1997 the company also acquired the assets of
a European fastener business, Atro Industriale, SpA.
Debt activities consisted of paydowns of scheduled maturities as well as
an increase in short term debt to fund working capital needs. In addition,
short term debt and cash were higher at the end of the year due to the timing
of cash flows from organizational restructuring which will be eliminated in
early 1998 as well as some year end interest arbitrage. Overall, the company's
borrowing capacity remains very strong. The debt to total capital ratio of
40.5% was inflated due to the recent restructuring charges.
MARKET RISK
Market risk is the potential economic loss that may result from adverse
changes in the fair value of financial instruments. The company is exposed to
market risk from changes in foreign currency exchange rates and interest rates.
Exposure to foreign currency risk results because the company, through its
global businesses, enters into transactions and makes investments denominated
in multiple currencies. The company's predominant exposures are in European and
Canadian currencies. All cross-currency trade flows arising from sales and
procurement activities are consolidated and netted prior to obtaining risk
protection, primarily purchased basket options. The company is able to take
advantage of its global positioning by using naturally offsetting exposures to
reduce the cost of purchasing protection. From time to time, the company also
enters into forward exchange contracts to reduce the earnings and cash flow
impact of non-functional currency denominated receivables and payables,
predominately intercompany transactions. Gains and losses from these hedging
instruments offset the gains or losses on the underlying net exposures, assets
and liabilities being hedged. The company has also entered into several
cross-currency interest rate swaps, primarily to reduce overall borrowing
costs, but also providing a partial hedge of the net investments in certain
subsidiaries. Sensitivity to foreign currency exposure risk from these
financial instruments at the end of fiscal 1997 would have been immaterial
based on the potential loss in fair value from a hypothetical 10% adverse
movement in all currencies.
The company's exposure to interest rate risk results from its outstanding
debt obligations, short term investments and derivative financial instruments
employed in the management of its debt portfolio. The debt portfolio is managed
to achieve capital structure targets and reduce the overall cost of borrowing
by using a combination of fixed and floating rate debt as well as interest rate
swaps, caps and cross-currency interest rate swaps. The company's primary
exposure to interest risk comes from its floating rate debt in the US, Canada
and Europe and is fairly represented by changes in local LIBOR rates. At
January 3, 1998, the result of a hypothetical 1% increase in short term LIBOR
rates would not have resulted in a material impact on the pretax profit of the
company.
The company has access to financial resources and borrowing capabilities
around the world. As of year end 1997, the company had approximately $381
million of unused lines of credit and $100 million of unissued debt securities
registered with the Securities and Exchange Commission. The company believes
that its strong financial position, operating cash flows and borrowing capacity
provide the financial flexibility necessary to continue its record of annual
dividend payments, to invest in the routine needs of its businesses, to make
strategic acquisitions and to fund the restructuring and other initiatives
encompassed by its growth strategy.
27
OTHER MATTERS
ENVIRONMENTAL
The company incurs costs related to environmental issues as a result of
various laws and regulations governing current operations as well as the
remediation of previously contaminated sites. Future laws and regulations are
expected to be increasingly stringent and will likely increase the company's
expenditures related to routine environmental matters.
The company accrues for anticipated costs associated with investigatory
and remediation efforts in accordance with appropriate accounting guidelines
which address probability and the ability to reasonably estimate future costs.
The liabilities are reassessed whenever circumstances become better defined or
remediation efforts and their costs can be better estimated. Subject to the
imprecision in estimating future environmental costs, the company believes that
any sum it may pay in connection with environmental matters in excess of the
amounts recorded will not have a materially adverse effect on its financial
position, results of operations or liquidity.
YEAR 2000 SYSTEMS ISSUES
The company has determined that it will need to modify or replace
significant portions of its software and some hardware so that its computer
systems will function properly with respect to dates in the year 2000 and
beyond. The company also has initiated discussion with its significant
suppliers, customers and financial institutions to ensure that those parties
have appropriate plans to remediate Year 2000 issues where their systems
interface with the company's systems or otherwise impact its operations. The
company is assessing the extent to which its operations are vulnerable should
those organizations fail to properly remediate their computer systems.
The company's comprehensive Year 2000 initiative is being managed
internally by a team of experienced professionals. The team's activities are
designed to ensure that there is no adverse effect on the company's core
business operations and that transactions with customers, suppliers, and
financial institutions are fully supported. The initiative encompasses all
business systems, including administrative, manufacturing and distribution
equipment that utilize microprocessors. Project completion is expected by mid
1999. While the company believes its plans are adequate to address its Year
2000 concerns, many factors could affect its ultimate success including, but
not limited to, the continued availability of outside resources. The project is
not expected to exceed $40 to $50 million in cost, some of which is potentially
capitalizable. This cost range is based on management's best estimates, which
were derived utilizing assumptions about future events. The results could
differ materially from those anticipated subject to uncertainties regarding the
availability of resources and the impact of the issue on key suppliers and
customers among others.
NEW ACCOUNTING PRONOUNCEMENTS
The FASB issued Statement of Financial Accounting Standards (SFAS) No.
130, "Reporting Comprehensive Income," and SFAS No. 131, "Disclosures about
Segments of an Enterprise and Related Information," in June of 1997. These
standards establish new disclosures for comprehensive income and segments and
will be effective for fiscal 1998. New disclosures will include a comprehensive
income number and reporting operating segments in accordance with internal
management structure.
CAUTIONARY STATEMENTS
Certain risks and uncertainties are inherent in the company's ability to
achieve operational excellence and deliver sustained, profitable growth to its
shareholders as outlined in this Annual Report to Shareholders.
The company's drive for operational excellence is focused on improving
customer service, consolidating multiple manufacturing and distribution
facilities, outsourcing non-core activities and converting to common systems.
The ability to implement the initiatives associated with these goals is
dependent on the company's ability to implement the Stanley Production System
and to develop and execute comprehensive plans for facility consolidations, the
ability of the organization to complete the transition to a product management
structure without losing focus on the business, the availability of vendors to
perform non-core functions being outsourced, the successful recruitment and
training of new employees, the resolution of any labor issues related to
closing facilities, the need to respond to significant changes in product
demand during the transition and other unforeseen events.
The company's ability to generate sustained, profitable growth is
dependent on successfully freeing up resources to fund new product and brand
development and new ventures to broaden its markets and to defend market share
in the face of intense price competition. Success at developing new products
will depend on the ability of the new product development process to foster
creativity and identify viable new product ideas as well as the company's
ability to attract new product engineers. The achievement of growth through new
ventures will depend upon the ability to successfully identify, negotiate,
consummate and integrate into operations acquisitions, joint ventures and/or
strategic alliances.
The company's ability to achieve and sustain the improvements resulting
from these initiatives will be dependent on the extent of pricing pressure and
other changes in its competitive markets, the continued consolidation of
customers in consumer channels, increasing global competition, changes in
trade, monetary and fiscal policies and laws, inflation, currency exchange
fluctuations, the impact of currency exchange rates on the competitiveness of
products and recessionary or expansive trends in the economies in which the
company operates.
28
BUSINESS SEGMENT INFORMATION
INDUSTRY SEGMENTS
The company operates worldwide in three reportable segments: Tools,
Hardware and Specialty Hardware. Additional sales detail is provided for the
Consumer, Industrial and Engineered tool categories within the Tools segment.
GEOGRAPHIC AREAS
The company has manufacturing and warehouse facilities and sales offices
in the United States, Europe and Other Areas. The company's operations in
Europe are principally located in the European Economic Community. Other Areas
principally include Canada, Australia, the Far East and Latin America
INDUSTRY SEGMENTS
(Millions of Dollars) 1997 1996 1995
- ----------------------------------------------------
NET SALES
Tools
Consumer $ 754.0 $ 751.1 $756.5
Industrial 552.2 538.7 534.7
Engineered 717.4 686.4 678.3
- ----------------------------------------------------
Total Tools 2,023.6 1,976.2 1,969.5
Hardware 352.2 340.4 324.2
Specialty Hardware 293.7 354.2 330.6
- ----------------------------------------------------
Consolidated $ 2,669.5 $ 2,670.8 $ 2,624.3
- ----------------------------------------------------
OPERATING PROFIT (LOSS)
Tools $61.1 $196.6 $154.9
Hardware 16.4 42.4 13.4
Specialty Hardware (12.3) 12.2 17.8
- ----------------------------------------------------
Total 65.2 251.2 186.1
Net corporate expenses (59.1) (48.9) (37.6)
Interest expense (24.7) (28.1) (35.7)
- ----------------------------------------------------
Earnings (loss) before
income taxes $ (18.6) $174.2 $ 112.8
- ----------------------------------------------------
IDENTIFIABLE ASSETS
Tools $ 1,381.2 $ 1,268.2 $ 1,287.5
Hardware 185.7 178.3 174.9
Specialty Hardware 93.8 105.2 99.5
- ----------------------------------------------------
1,660.7 1,551.7 1,561.9
General corporate assets 98.0 107.9 108.1
- ----------------------------------------------------
Total $ 1,758.7 $ 1,659.6 $ 1,670.0
- ----------------------------------------------------
Capital Expenditures
Tools $ 67.6 $81.0 $ 65.4
Hardware 7.0 11.8 9.9
Specialty Hardware 6.0 8.3 7.2
DEPRECIATION AND
AMORTIZATION
Tools 58.0 58.7 63.6
Hardware 9.4 9.6 10.9
Specialty Hardware 2.6 4.1 4.1
- ----------------------------------------------------
GENERAL INFORMATION
Intercompany sales between geographic areas and between business segments
were not significant. Segment information includes allocations of expenses and
assets shared by the segments.
In 1997, sales to a major customer were approximately 12% of consolidated
sales but were less than 10% in previous years.
Operating profit represents net sales less operating expenses. In
computing operating profit, the following have been excluded: net corporate
expenses, interest expense and income taxes.
Identifiable assets are those assets used in the company's operations in
each segment or area.
GEOGRAPHIC AREAS
(Millions of Dollars) 1997 1996 1995
- -----------------------------------------------------
NET SALES
United States $ 1,900.6 $ 1,911.5 $ 1,884.9
Europe 423.6 421.8 413.4
Other Areas 345.3 337.5 326.0
- -----------------------------------------------------
Consolidated $ 2,669.5 $ 2,670.8 $ 2,624.3
- -----------------------------------------------------
OPERATING PROFIT (LOSS)
United States $ 83.1 $ 212.5 $ 146.9
Europe (18.5) 24.8 26.8
Other Areas .6 13.9 12.4
- -----------------------------------------------------
Total $ 65.2 $ 251.2 $186.1
- -----------------------------------------------------
IDENTIFIABLE ASSETS
United States $ 1,001.6 $ 996.0 $1,028.5
Europe 389.1 321.6 314.1
Other Areas 315.6 277.2 255.9
Eliminations (45.6) (43.1) (36.6)
- -----------------------------------------------------
Total $ 1,660.7 $ 1,551.7 $1,561.9
- -----------------------------------------------------
Note: In 1997, 1996 and 1995, restructuring charges of $194.8 million,
$44.6 million, and $64.2 million, respectively, were included in the Tools
segment; charges of $17.8 million in 1997 and $13.6 million in 1995 were
included in the Hardware segment; charges of $23.5 million, $.3 million, and
$2.0 million, respectively, were included in the Specialty Hardware segment;
and charges of $2.4 million, $2.9 million, and $5.7 million, respectively, were
included in Net corporate expenses.
In 1997, 1996 and 1995, restructuring charges of $145.6 million, $17.2
million and $55.2 million, respectively, were included in the United States;
charges of $61.8 million, $17.1 million and $16.3 million, respectively, were
included in Europe; and charges of $28.7 million, $10.6 million and $8.3
million, respectively, were included in Other Areas.
Included in Net corporate expenses for 1997 and 1996 were charges of $10.6
million and $7.6 million, respectively, for items specified in the company's
employment contract with its chief executive officer.
The "Operating Results: Pro Forma Comparative Analysis" included in the
Management's Discussion and Analysis section of this report provides further
analysis of the restructuring charges, asset write-offs and related transition
costs.
29
THE STANLEY WORKS AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Fiscal years ended January 3, 1998, December 28, 1996 and December 30, 1995
(Millions of Dollars, except per share amounts) 1997 1996 1995
- ----------------------------------------------------------------------------------------------------------------------------------
NET SALES $ 2,669.5 $ 2,670.8 $ 2,624.3
COSTS AND EXPENSES
Cost of sales 1,783.4 1,795.5 1,789.7
Selling, general and administrative 627.7 608.5 591.7
Interest-net 16.6 22.5 30.3
Other-net 21.9 22.3 14.3
Restructuring and asset write-offs 238.5 47.8 85.5
- ----------------------------------------------------------------------------------------------------------------------------------
2,688.1 2,496.6 2,511.5
- ----------------------------------------------------------------------------------------------------------------------------------
EARNINGS (LOSS) BEFORE INCOME TAXES (18.6) 174.2 112.8
INCOME TAXES 23.3 77.3 53.7
- ----------------------------------------------------------------------------------------------------------------------------------
NET EARNINGS (LOSS) $ (41.9) $ 96.9 $ 59.1
- ----------------------------------------------------------------------------------------------------------------------------------
NET EARNINGS (LOSS) PER SHARE OF COMMON STOCK
BASIC $ (.47) $ 1.09 $ .66
DILUTED $ (.47) $ 1.08 $ .66
- ----------------------------------------------------------------------------------------------------------------------------------
See notes to consolidated financial statements.
30
THE STANLEY WORKS AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
January 3, 1998 and December 28, 1996
(Millions of Dollars) 1997 1996
- ----------------------------------------------------------------------------------------------------------------------------------
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 152.2 $ 84.0
Accounts and notes receivable 472.5 446.3
Inventories 301.2 338.1
Deferred taxes 51.1 14.0
Other current assets 28.3 28.5
- ----------------------------------------------------------------------------------------------------------------------------------
TOTAL CURRENT ASSETS 1,005.3 910.9
PROPERTY, PLANT AND EQUIPMENT 513.2 570.4
GOODWILL AND OTHER INTANGIBLES 104.1 98.9
OTHER ASSETS 136.1 79.4
- ----------------------------------------------------------------------------------------------------------------------------------
TOTAL ASSETS $ 1,758.7 $ 1,659.6
- ----------------------------------------------------------------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Short-term borrowings $ 80.8 $ 4.9
Current maturities of long-term debt 50.0 15.1
Accounts payable 155.5 130.8
Accrued expenses 336.4 230.8
- ----------------------------------------------------------------------------------------------------------------------------------
TOTAL CURRENT LIABILITIES 622.7 381.6
LONG-TERM DEBT 283.7 342.6
RESTRUCTURING RESERVES 67.6 -
OTHER LIABILITIES 176.9 155.3
SHAREHOLDERS' EQUITY
Preferred stock, without par value:
Authorized and unissued 10,000,000 shares
Common stock, par value $2.50 per share:
Authorized 200,000,000 shares;
issued 92,343,410 shares in 1997 and 1996 230.9 230.9
Retained earnings 806.6 919.0
Foreign currency translation adjustment (85.3) (45.5)
ESOP debt (223.8) (234.8)
- ----------------------------------------------------------------------------------------------------------------------------------
728.4 869.6
Less: cost of common stock in treasury
(3,555,329 shares in 1997 and 3,623,618 shares in 1996) 120.6 89.5
- ----------------------------------------------------------------------------------------------------------------------------------
TOTAL SHAREHOLDERS' EQUITY 607.8 780.1
- ----------------------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 1,758.7 $ 1,659.6
- ----------------------------------------------------------------------------------------------------------------------------------
See notes to consolidated financial statements.
31
THE STANLEY WORKS AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Fiscal years ended January 3, 1998, December 28, 1996 and December 30, 1995
(Millions of Dollars) 1997 1996 1995
- ----------------------------------------------------------------------------------------------------------------------------------
OPERATING ACTIVITIES:
Net earnings (loss) $ (41.9) $ 96.9 $ 59.1
Adjustments to reconcile net earnings (loss) to net cash
provided by operating activities:
Depreciation and amortization 72.4 74.7 81.2
Restructuring and asset write-offs 238.5 47.8 85.5
Other non-cash items (17.9) 38.5 32.3
Changes in operating assets and liabilities:
Accounts and notes receivable (38.7) (28.9) (23.3)
Inventories 8.6 (10.5) (4.5)
Accounts payable and accrued expenses (.7) 9.5 (27.8)
Income taxes 21.8 24.3 (24.1)
Other (.9) 7.6 (.3)
Net cash provided by operating activities 241.2 259.9 178.1
- ----------------------------------------------------------------------------------------------------------------------------------
INVESTING ACTIVITIES:
Capital expenditures (73.3) (78.7) (66.5)
Capitalized software (10.8) (25.0) (20.2)
Proceeds from sales of businesses 34.8 36.4 -
Business acquisitions (58.4) (5.3) (3.3)
Investment in affiliated company (23.1) - -
Other 5.4 10.8 4.7
Net cash used by investing activities (125.4) (61.8) (85.3)
- ----------------------------------------------------------------------------------------------------------------------------------
FINANCING ACTIVITIES:
Payments on long-term debt (7.4) (26.0) (83.5)
Proceeds from long-term borrowings 2.8 2.0 86.0
Net short-term financing 75.3 (72.3) (5.1)
Proceeds from issuance of common stock 40.5 36.5 5.7
Purchase of common stock for treasury (83.0) (65.7) (13.2)
Cash dividends on common stock (68.6) (67.6) (75.2)
Net cash used by financing activities (40.4) (193.1) (85.3)
- ----------------------------------------------------------------------------------------------------------------------------------
Effect of exchange rate changes on cash (7.2) 3.6 (1.4)
- ----------------------------------------------------------------------------------------------------------------------------------
INCREASE IN CASH AND CASH EQUIVALENTS 68.2 8.6 6.1
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 84.0 75.4 69.3
- ----------------------------------------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS, END OF YEAR $ 152.2 $ 84.0 $ 75.4
- ----------------------------------------------------------------------------------------------------------------------------------
See notes to consolidated financial statements.
32
THE STANLEY WORKS AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
Fiscal years ended January 3, 1998, December 28, 1996 and December 30, 1995
Foreign
Capital Currency
(Millions of Dollars, Common In Excess Retained Translation Treasury Shareholders'
except per share amounts) Stock of Par Value Earnings Adjustment ESOP Debt Stock Equity
- -------------------------------------------------------------------------------------------------------------------------------
BALANCE DECEMBER 31, 1994 $ 115.4 $ 70.1 $ 937.8 $ (56.3) $ (253.7) $ (69.1) $ 744.2
Net earnings 59.1 59.1
Currency translation adjustment (14.3) (14.3)
Cash dividends declared--$.71 per share (62.6) (62.6)
Issuance of common stock (1.7) 13.9 12.2
Purchase of common stock (16.7) (16.7)
ESOP debt 9.4 9.4
ESOP tax benefit 3.3 3.3
- -------------------------------------------------------------------------------------------------------------------------------
BALANCE DECEMBER 30, 1995 115.4 68.4 937.6 (70.6) (244.3) (71.9) 734.6
Two-for-one stock split 115.5 (66.9) (48.6) -
Net earnings 96.9 96.9
Currency translation adjustment 25.1 25.1
Cash dividends declared--$.73 per share (65.2) (65.2)
Issuance of common stock (6.2) (5.1) 53.4 42.1
Purchase of common stock (71.0) (71.0)
Tax benefit related to stock options 4.7 .3 5.0
ESOP debt 9.5 9.5
ESOP tax benefit 3.1 3.1
- -------------------------------------------------------------------------------------------------------------------------------
Balance December 28, 1996 230.9 - 919.0 (45.5) (234.8) (89.5) 780.1
Net loss (41.9) (41.9)
Currency translation adjustment (39.8) (39.8)
Cash dividends declared--$.77 per share (68.6) (68.6)
Issuance of common stock (13.4) 61.1 47.7
Purchase of common stock (92.2) (92.2)
Tax benefit related to stock options 8.7 8.7
ESOP debt 11.0 11.0
ESOP tax benefit 2.8 2.8
- -------------------------------------------------------------------------------------------------------------------------------
BALANCE JANUARY 3, 1998 $ 230.9 $ - $ 806.6 $ (85.3) $ (223.8) $ (120.6) $ 607.8
- -------------------------------------------------------------------------------------------------------------------------------
See notes to consolidated financial statements.
33
STANLEY 1997 ANNUAL REPORT
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
A. SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The consolidated financial statements include the accounts of the company
and its majority-owned subsidiaries which require consolidation, after the
elimination of intercompany accounts and transactions. The company's fiscal
year ends on the Saturday nearest to December 31. There were 53 weeks in fiscal
year 1997 and 52 weeks in fiscal years 1996 and 1995.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets, liabilities, revenues
and expenses, as well as certain financial statement disclosures. While
management believes that the estimates and assumptions used in the preparation
of the financial statements are appropriate, actual results could differ from
these estimates.
FOREIGN CURRENCY TRANSLATION
For most foreign operations, asset and liability accounts are translated
at current exchange rates; income and expenses are translated using weighted
average exchange rates. Resulting translation adjustments, as well as gains and
losses from certain intercompany transactions, are reported in a separate
component of shareholders' equity. Translation adjustments for operations in
highly inflationary economies and exchange gains and losses on transactions are
included in earnings.
CASH EQUIVALENTS
Highly liquid investments with original maturities of three months or less
are considered cash equivalents.
INVENTORIES
U.S. inventories are valued at the lower of last-in, first-out (LIFO) cost
or market. Other inventories are valued generally at the lower of first-in,
first-out (FIFO) cost or market.
LONG-LIVED ASSETS
Property, plant and equipment are stated on the basis of historical cost
less accumulated depreciation. Depreciation is provided using a combination of
accelerated and straight-line methods over the estimated useful lives of the
assets.
Goodwill is amortized on a straight-line basis over periods not exceeding
forty years. The company periodically evaluates the existence of goodwill
impairment on the basis of whether amounts recorded are recoverable from
projected undiscounted cash flows of related businesses. Impairment losses are
valued by comparing the carrying value of the goodwill to its fair value,
generally determined by the discounted cash flow method.
Impairment losses are recorded on long-lived assets used in operations
when indicators of impairment are present and the undiscounted cash flows
estimated to be generated by those assets are less than the assets' carrying
amount. Impairment losses were charged to operations in 1997, 1996 and 1995
and were included in Restructuring and asset write-offs on the statement of
operations.
FINANCIAL INSTRUMENTS
To manage interest rate exposure, the company enters into interest rate
swap agreements. The net interest paid or received on the swaps is recognized
as interest expense. Gains resulting from the early termination of interest
rate swap agreements are deferred and amortized as adjustments to interest
expense over the remaining period originally covered by the terminated swap.
The company manages exposure to fluctuations in foreign exchange rates by
creating offsetting positions through the use of forward exchange contracts or
currency options. The company enters into forward exchange contracts to hedge
intercompany loans and enters into purchased foreign currency options to hedge
anticipated transactions. Gains and losses on forward exchange contracts are
deferred and recognized as part of the underlying transactions. Changes in the
fair value of options, representing a basket of foreign currencies purchased to
hedge anticipated cross-currency cash flows, are included in Other-net expense.
The company does not use financial instruments for trading or speculative
purposes.
INCOME TAXES
Income tax expense is based on reported earnings (loss) before income
taxes. Deferred income taxes reflect the impact of temporary differences
between assets and liabilities recognized for financial reporting purposes and
such amounts recognized for tax purposes, and are measured by applying enacted
tax rates in effect in years in which the differences are expected to reverse.
EARNINGS PER SHARE
In 1997, the company adopted Statement of Financial Accounting Standards
(SFAS) No. 128, "Earnings per Share". This statement specifies the computation,
presentation and disclosure requirements for earnings per share. Under SFAS No.
128, basic earnings per share equals net earnings divided by weighted average
shares outstanding during the year. Diluted earnings per share includes the
impact of common stock equivalents using the treasury stock method when the
effect is dilutive. All per share data has been retroactively restated in
accordance with SFAS No. 128.
34
STOCK-BASED COMPENSATION
The company accounts for its employee stock compensation plans under
Accounting Principles Board (APB) Opinion No. 25, "Accounting for Stock Issued
to Employees." Accordingly, no compensation cost is recognized for stock-based
compensation unless the quoted market price of the stock at the grant date is
in excess of the amount the employee must pay to acquire the stock. Pro forma
disclosures of net earnings and earnings per share, as if the fair value based
method of accounting had been applied, are presented in Note J.
RECLASSIFICATIONS
Certain prior years amounts have been reclassified to conform with the
current year presentation.
B. ACQUISITIONS
In November 1997, the company acquired the assets of Atro Industriale, a
manufacturer and distributor of pneumatic fastening tools, collated nails, and
staples for $50.8 million. The acquisition was accounted for under the purchase
method of accounting, and accordingly, the 1997 consolidated statement of
operations includes the operating results from the acquisition date. The fair
value of assets acquired and liabilities assumed was $77.7 million and $26.9
million, respectively. The acquisition did not have a material pro forma impact
on operations.
C. ACCOUNTS AND NOTES RECEIVABLE
Trade receivables are dispersed among a large number of retailers,
distributors and industrial accounts in many countries. Adequate provisions
have been established to cover anticipated credit losses. At January 3, 1998
and December 28, 1996, allowances for doubtful receivables of $19.8 million and
$22.5 million, respectively, were applied as a reduction of current accounts
and notes receivable. The company believes it has no significant concentrations
of credit risk as of January 3, 1998.
The company sells certain domestic accounts receivable under a revolving
sales agreement. The proceeds from these sales were $61.9 million in 1997,
$73.1 million in 1996 and $71.7 million in 1995.
D. INVENTORIES
(Millions of Dollars) 1997 1996
- ---------------------------------------------------
Finished products $ 203.7 $ 223.2
Work in process 51.9 61.7
Raw materials 43.8 50.9
Supplies 1.8 2.3
- ---------------------------------------------------
$ 301.2 $ 338.1
- ---------------------------------------------------
Inventories in the amount of $160.8 million at January 3, 1998 and $185.2
million at December 28, 1996 were valued at the lower of LIFO cost or market.
If LIFO inventories had been valued at FIFO costs, they would have been $120.3
million higher than reported at both January 3, 1998 and December 28, 1996.
E. PROPERTY, PLANT AND EQUIPMENT
(Millions of Dollars) 1997 1996
- ---------------------------------------------------
Land $ 34.7 $ 39.2
Buildings 239.7 245.1
Machinery and equipment 833.4 872.4
Computer software 58.3 67.7
- ---------------------------------------------------
1,166.1 1,224.4
Less: accumulated depreciation
and amortization 652.9 654.0
- ---------------------------------------------------
$513.2 $570.4
- ---------------------------------------------------
The provisions for depreciation and amortization for 1997, 1996 and 1995
were $65.2 million, $65.9 million and $68.3 million, respectively.
F. GOODWILL AND OTHER INTANGIBLES
Goodwill and other intangibles at the end of each fiscal year, net of
accumulated amortization of $72.2 million and $69.9 million, were as follows:
(Millions of Dollars) 1997 1996
- ---------------------------------------------------
Goodwill $ 79.0 $ 78.0
Other 25.1 20.9
- ---------------------------------------------------
$104.1 $ 98.9
- ---------------------------------------------------
G. ACCRUED EXPENSES
(Millions of Dollars) 1997 1996
- ---------------------------------------------------
Payroll and related taxes $ 66.3 $ 68.2
Insurance 25.9 28.7
Restructuring 99.7 26.9
Income taxes 34.1 21.4
Other 110.4 85.6
- ---------------------------------------------------
$336.4 $230.8
- ---------------------------------------------------
35
H. LONG-TERM DEBT
AND FINANCING ARRANGEMENTS
(Millions of Dollars) 1997 1996
- ------------------------------------------------------------
Notes payable in 2002 7.4% $ 100.0 $ 100.0
Commercial Paper 5.7% 89.3 89.3
Notes payable in 1998 9.0% 34.8 34.8
Notes payable due
semiannually to 2005 6.2% 34.3 38.2
Industrial Revenue Bonds due
in varying amounts to 2010 5.8-6.8% 19.6 21.9
ESOP loan guarantees,
payable in varying
monthly installments
through 2001 7.7% 46.5 57.5
Other 9.2 16.0
- ------------------------------------------------------------
333.7 357.7
Less: current maturities 50.0 15.1
- ------------------------------------------------------------
$ 283.7 $ 342.6
- ------------------------------------------------------------
Commercial paper outstanding at January 3, 1998 of $89.3 million is
classified as non-current pursuant to the company's intention and ability to
continue to finance this obligation on a long-term basis.
The company has on file with the Securities and Exchange Commission a
shelf registration statement covering the issuance of up to $200.0 million of
debt securities; as of January 3, 1998, $100.0 million remained unused. The
company has unused short and long-term credit arrangements with several banks
to borrow up to $300.0 million at the lower of prime or money market rates. Of
this amount, $150.0 million is long-term. Commitment fees range from .05% to
.07%. In addition, the company has short-term lines of credit with numerous
foreign banks aggregating $80.9 million of which $80.7 million was available at
January 3, 1998. Short-term arrangements are reviewed annually for renewal. Of
the long-term and short-term lines, $300.0 million is available to support the
company's commercial paper program. The weighted average interest rates on
short-term borrowings at January 3, 1998 and December 28, 1996 were 6.4% and
15.6%, respectively.
The company has guaranteed the long-term notes payable to banks of its
employee stock ownership plan (ESOP). The guarantee is reflected in the
consolidated balance sheets as long-term debt with a corresponding reduction in
shareholders' equity.
To manage interest costs and foreign exchange risk, the company maintains
a portfolio of interest rate swap agreements. The portfolio includes currency
swaps maturing in 1999 that convert $89.3 million of commercial paper debt into
Swiss Franc debt (5.3% weighted average rate). The company also has a currency
swap that converts $34.3 million of variable rate United States dollar debt to
variable rate Dutch Guilder debt (4.0% weighted average rate). See Note I for
more information regarding the company's interest rate and currency swap
agreements.
Aggregate annual maturities of long-term debt for the years 1999 to 2002
are $17.1 million, $18.0 million, $104.7 million and $119.3 million,
respectively. Interest paid during 1997, 1996 and 1995 amounted to $22.7
million, $26.0 million and $33.9 million, respectively.
Commercial paper, utilized to support working capital requirements,
classified as current was $26.9 million and $1.1 million, as of January 3, 1998
and December 28, 1996, respectively.
I. FINANCIAL INSTRUMENTS
The company's objectives in using debt related financial instruments are
to obtain the lowest cost source of funds within an acceptable range of
variable to fixed rate debt proportions, and to minimize the foreign exchange
risk of obligations. To meet these objectives the company enters into interest
rate swap and currency swap agreements. A summary of instruments and weighted
average interest rates follows. The weighted average variable pay and receive
rates are based on rates in effect at the balance sheet dates. Variable rates
are generally based on LIBOR or commercial paper rates with no leverage
features.
(Millions of Dollars) 1997 1996
- ---------------------------------------------------
Interest rate swaps
Receive fixed-pay variable rates $ 50.0 $ 50.0
pay rate 5.7% 5.5%
receive rate 6.2% 6.2%
maturity dates 2002 2002
Receive variable-pay fixed rates $ 88.0 $ 23.1
pay rate 4.4% 4.4%
receive rate 5.8% 5.5%
maturity dates 1999 1999
Currency swaps $ 105.5 $149.7
pay rate 4.2% 4.5%
receive rate 5.9% 5.8%
maturity dates 1999-2005 1999-2005
- ---------------------------------------------------
The company uses purchased currency options to reduce exchange risks
arising from cross-border cash flows expected to occur over the next one year
period. In addition, the company enters into forward exchange contracts to
hedge intercompany loans. The objective of these practices is to minimize the
impact of foreign currency fluctuations on operating results. At January 3,
1998 and December 28, 1996, the company had forward contracts hedging
intercompany loans totaling $15.6 million and $14.5 million, respectively. At
January 3, 1998 and December 28, 1996, currency basket options hedged
anticipated transactions totaling $166.0 million and $131.4 million,
respectively. The forward contracts and options are primarily denominated in
Canadian dollars, Australian dollars, Taiwanese dollars, and major European
currencies and generally mature within the next one year period.
The counterparties to these interest rate and currency financial
instruments are major international financial institutions. The company is
exposed to credit risk for net exchanges under these agreements, but not for
the notional amounts. The company considers the risk of default to be remote.
36
A summary of the carrying values and fair values of the company's
financial instruments at January 3, 1998 and December 28, 1996 is as follows:
(Millions of Dollars) 1997 1996
- ------------------------------------------------------
Carrying Fair Carrying Fair
Value Value Value Value
- ------------------------------------------------------
Long-term debt,
including
current portion $334.3 $336.6 $350.4 $355.4
Currency and
interest rate swaps (.6) (.8) 7.3 8.3
- ------------------------------------------------------
$333.7 $335.8 $357.7 $363.7
- ------------------------------------------------------
Generally, the carrying value of the debt related financial instruments is
included in the balance sheet in long-term debt. The fair values of long-term
debt are estimated using discounted cash flow analysis, based on the company's
marginal borrowing rates. The fair values of foreign currency and interest rate
swap agreements are based on current settlement values. The carrying amount of
cash equivalents and short-term borrowings approximates fair value.
J. CAPITAL STOCK
STOCK SPLIT
On April 17, 1996, the shareholders approved an increase in the number of
authorized common shares from 110,000,000 to 200,000,000. On that date, the
Board of Directors declared a two-for-one common stock split to be effected by
the distribution of one additional share for each share outstanding. Such
distribution was made on June 3, 1996 to shareholders of record as of May 13,
1996. Accordingly, the stock split was recognized by reclassifying $115.5
million, the par value of the additional shares resulting from the split, from
capital in excess of par value and retained earnings to common stock. All
shares outstanding and per share amounts were restated to reflect the stock
split.
EARNINGS PER SHARE COMPUTATION
The company adopted SFAS No. 128 in 1997 (see note A). The following table
reconciles the weighted average shares outstanding used to calculate basic and
diluted earnings per share.
(Millions of dollars, except share
and per share amounts) 1997 1996 1995
- -----------------------------------------------------------------------
Net earnings (loss)-
basic and diluted $ (41.9) $ 96.9 $ 59.1
- -----------------------------------------------------------------------
Basic earnings per share-
weighted average shares 89,469,849 89,151,668 89,043,185
Dilutive effect of
employee stock options - 652,349 795,454
- -----------------------------------------------------------------------
Diluted earnings per share-
weighted average shares 89,469,849 89,804,017 89,838,639
- -----------------------------------------------------------------------
Earnings (loss) per share:
Basic $ (.47) $ 1.09 $ .66
Diluted $ (.47) $ 1.08 $ .66
The effect of employee stock options for 1997 was 1,002,456 shares. These
shares are not included in the calculations since they are antidilutive.
COMMON STOCK SHARE ACTIVITY
The activity in common shares for each year, net of treasury stock, was as
follows:
1997 1996 1995
- -------------------------------------------------------------------
Outstanding,
beginning of year 88,719,792 88,758,830 88,898,750
Issued for employee
stock plans 2,239,606 2,465,416 698,592
Purchased (2,171,317) (2,504,454) (838,512)
- -------------------------------------------------------------------
Outstanding, end of year 88,788,081 88,719,792 88,758,830
- -------------------------------------------------------------------
COMMON STOCK RESERVED
At January 3, 1998 and December 28, 1996, the number of shares of common
stock reserved for future issuance under various employee and director stock
plans was as follows:
1997 1996
- ----------------------------------------------------------
Employee Stock Purchase Plan 4,666,251 5,400,288
Stock Option Plans 7,673,877 9,039,112
Long-Term Stock Incentive Plan 2,833,335 2,895,066
- ----------------------------------------------------------
15,173,463 17,334,466
- ----------------------------------------------------------
PREFERRED STOCK PURCHASE RIGHTS
Each outstanding share of common stock has one half of a share purchase
right. Each purchase right may be exercised to purchase one two-hundredth of a
share of Series A Junior Participating Preferred Stock at an exercise price of
$220.00, subject to adjustment. The rights, which do not have voting rights,
expire on March 10, 2006, and may be redeemed by the company at a price of $.01
per right at any time prior to the 10th day following the public announcement
that a person has acquired beneficial ownership of 10% or more of the
outstanding shares of common stock.
In the event that the company is acquired in a merger or other business
combination transaction, provision shall be made so that each holder of a right
(other than a holder who is a 10%-or-more shareholder) shall have the right to
receive, upon exercise thereof, that number of shares of common stock of the
surviving company having a market value equal to two times the exercise price
of the right. Similarly, if anyone becomes the beneficial owner of more than
10% of the then outstanding shares of common stock (except pursuant to an offer
for all outstanding shares of common stock which the independent directors have
deemed to be fair and in the best interest of the company), provision will be
made so that each holder of a right (other than a holder who is a 10%-or-more
shareholder) shall thereafter have the right to receive, upon exercise thereof,
common stock (or, in certain circumstances, cash, property or other securities
of the company) having a market value equal to two times the exercise price of
the right. At January 3, 1998, there were 44,394,041 outstanding rights. There
are 250,000 shares of Series A Junior Participating Preferred Stock reserved
for issuance in connection with the rights.
37
STOCK OPTIONS AND AWARDS
The company has a stock option plan for officers and key employees that
provides for nonqualified and incentive stock option grants. The company also
has a stock option plan that provides for option grants to outside directors of
the company. Options are granted at the market price of the company's stock on
the date of grant and have a maximum term of 10 years.
In December 1996, the company recruited a new Chairman and Chief Executive
Officer pursuant to a three year employment agreement. In addition to a base
salary, bonus and other annual benefits, 200,000 common stock equivalent share
units, and an option grant to purchase 1,000,000 shares at $27.562 (the market
value on the date of issuance) were awarded under the employment agreement.
Each share unit had a market value of $27.75 on the date of the grant and
represents the right to receive one share of common stock. The share units will
be distributed in three equal annual installments beginning in 2000. In fiscal
year 1996, the fair market value of the share units at their grant date was
charged to operations and included in Other-net expense in the Statement of
Operations. The option, which was approved by shareholders on April 23, 1997 at
the Annual Meeting, has a ten year term and is exercisable after June 1997.
Fiscal year 1997 includes a charge to operations representing the difference
between the exercise price and the fair market value as of the shareholder
approval date (effective grant date).
Information regarding the company's stock option plans is summarized
below:
1997 1996 1995
- ---------------------------------------------------------------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Options Price Options Price Options Price
- ---------------------------------------------------------------------------
Outstanding,
beginning
of year 3,784,738 $21.68 4,821,194 $18.34 4,261,602 $16.84
Granted 1,966,000 35.34 973,450 27.95 1,098,600 23.00
Exercised (1,365,235) 20.13 (1,973,230) 16.61 (469,814) 15.88
Forfeited (141,490) 22.21 (36,676) 21.29 (69,194) 16.33
- ----------------------------------------------------------------------------
Outstanding,
end of year 4,244,013 $28.49 3,784,738 $21.68 4,821,194 $18.34
- ----------------------------------------------------------------------------
Options
exercisable,
end of year 3,285,513 $24.13 2,811,288 $19.51 3,722,594 $16.96
- ----------------------------------------------------------------------------
Options outstanding as of January 3, 1998 had exercised prices as follows:
899,153 options ranging from $15.06 to $20.19, 2,378,860 options ranging from
$23.00 to $28.88 and 966,000 options ranging from $38.25 to $44.41. The
weighted average remaining contractual life of these options is 8.6 years.
EMPLOYEE STOCK PURCHASE PLAN
The Employee Stock Purchase Plan enables substantially all employees in
the United States and Canada to subscribe at any time to purchase shares of
common stock on a monthly basis at the lower of 85% of the fair market value of
the shares on the first day of the plan year ($37.19 per share for fiscal year
1998 purchases) or 85% of the fair market value of the shares on the last
business day of each month. A maximum of 6,000,000 shares are authorized for
subscription. During 1997, 1996 and 1995 shares totaling 734,037, 442,960 and
156,752, respectively, were issued under the plan at average prices of $23.69,
$19.61 and $17.29 per share, respectively.
LONG-TERM STOCK INCENTIVE PLAN
The Long-Term Stock Incentive Plan provides for the granting of awards to
senior management employees for achieving company performance measures over
five year cycles. The Plan is administered by the Compensation and Organization
Committee of the Board of Directors consisting of non-employee directors.
Awards are payable in shares of common stock as directed by the Committee. The
amounts of $3.5 million, $2.5 million and $.4 million were charged to expense
in 1997, 1996 and 1995, respectively. Shares totaling 61,731, 14,252 and 47,734
were issued in 1997, 1996 and 1995, respectively. The Compensation and
Organization Committee determined in 1994 not to make any further awards under
this plan. Accordingly, there will be no further payments under this plan
subsequent to the 1993-1997 and 1994-1998 award cycles.
STOCK COMPENSATION PLANS
The company accounts for stock option grants under its two stock-based
compensation plans and stock purchases under the Employee Stock Purchase Plan
in accordance with APB No. 25. Accordingly, no compensation cost has been
recognized for the majority of stock option grants since the options have
exercise prices equal to the market value of the company's common stock at the
date of grant. If compensation cost for the company's stock-based compensation
plans had been determined based on the fair value at the grant dates consistent
with the method prescribed by SFAS No. 123, "Accounting for Stock-Based
Compensation", the company's net earnings (loss) and earnings (loss) per share
would have been adjusted to the pro forma amounts indicated below:
1997 1996 1995
- --------------------------------------------------------------------
Pro forma net earnings (loss)
(in millions) $ (56.1) $ 90.4 $ 55.9
Pro forma earnings (loss) per share:
Basic $ (.63) $ 1.01 $ .63
Diluted $ (.63) $ 1.01 $ .62
- --------------------------------------------------------------------
38
During the initial phase-in period, as required by SFAS No. 123, the pro
forma amounts were determined based on the stock option grants and employee
stock purchases subsequent to January 1, 1995. Therefore, the pro forma amounts
may not be indicative of the effects of compensation cost on net earnings
(loss) and earnings (loss) per share in future years. Pro forma compensation
cost relating to the stock options is recognized over the six month vesting
period, while Employee Stock Purchase Plan compensation cost is recognized on
the first day of the plan year. The fair value of each stock option grant was
estimated on the date of grant using the Black-Scholes option pricing model
with the following weighted average assumptions used for grants in 1997, 1996
and 1995, respectively: dividend yield of 1.8%, 2.6% and 3.1%; expected
volatility of 25% for all years; risk-free interest rates of 6.0%, 6.1% and
6.2%; and expected lives of 7 years. The weighted average fair value of stock
options granted in 1997, 1996 and 1995 was $15.39, $8.02 and $6.18,
respectively. The fair value of the employees' purchase rights under the
Employee Stock Purchase Plan was estimated using the following assumptions for
1997, 1996 and 1995, respectively: dividend yield of 1.8%, 2.6% and 3.1%;
expected volatility of 25% for all years; risk-free interest rates of 6.0%,
5.6% and 5.8%; and expected lives of 1.2 years. The weighted average fair value
of those purchase rights granted in 1997, 1996 and 1995 was $8.53, $6.44 and
$5.65, respectively.
K. EMPLOYEE BENEFIT PLANS
EMPLOYEE STOCK OWNERSHIP PLAN (ESOP)
The Savings Plan provides opportunities for tax-deferred savings, enabling
eligible U.S. employees to acquire a proprietary interest in the company. Such
employees may contribute from 1% to 15% of their salary to the Plan. The
company contributes an amount equal to one-half of the first 7% of employee
contributions. The amounts in 1997, 1996 and 1995 under this matching
arrangement were $8.2 million, $8.4 million and $8.3 million, respectively.
Shares of the company's common stock held by the ESOP were purchased with
the proceeds of external borrowings in 1989 and borrowings from the company in
1991. The external ESOP borrowings are guaranteed by the company and are
included in long-term debt. Shareholders' equity reflects both the internal and
the external borrowing arrangements.
Shares are released to participant accounts based on principal and
interest payments of the underlying debt. These shares along with allocated
dividends and shares purchased on the open market are assigned to fund share
requirements of the employee contributions, the associated employer match and
the dividends earned on participant account balances.
Net ESOP activity recognized is based on total debt service and share
purchase requirements less employee contributions and dividends on ESOP shares.
The company's net ESOP activity resulted in income of $15.2 million in 1997,
$8.6 million in 1996 and $2.6 million in 1995.
Dividends on ESOP shares, which are charged to shareholders' equity as
declared, were $15.2 million, $15.1 million and $14.8 million in 1997, 1996 and
1995, respectively. Interest costs incurred by the ESOP on external debt for
1997, 1996 and 1995 were $4.0 million, $4.8 million and $5.5 million,
respectively. ESOP shares not yet allocated to participants are treated as
outstanding for purposes of computing earnings per share. As of January 3,
1998, the number of ESOP shares allocated to participant accounts was 8,954,931
and the number of unallocated shares was 10,007,568.
PENSION PLANS
The company sponsors non-contributory defined benefit pension plans
covering substantially all employees. Benefits for salaried and non-union
hourly employees are generally based on salary and years of service, while
those for collective bargaining employees are based on a stated amount for each
year of service. Additionally, the company contributes to several
union-sponsored multi-employer plans which provide defined benefits.
The company's funding policy is to contribute amounts determined annually
on an actuarial basis to provide for current and future benefits in accordance
with federal law and other regulations. Plan assets are invested in equity
securities, bonds, real estate and money market instruments. If the plans are
terminated or merged with another plan within three years following a change in
control of the company, any excess plan assets are to be applied to increase
the benefits of all participants.
Total pension expense includes the following components:
(Millions of Dollars) 1997 1996 1995
- -------------------------------------------------------------
Defined benefit plans:
Service cost $ 22.5 $ 20.8 $ 16.7
Interest cost 31.2 31.1 29.8
Actual return on plan assets (84.0) (51.2) (39.5)
Net amortization and deferral 48.5 17.8 6.5
Curtailment loss 5.7 - -
- -------------------------------------------------------------
Net pension expense 23.9 18.5 13.5
Multi-employer plans .8 .8 .8
- -------------------------------------------------------------
Total pension expense $ 24.7 $ 19.3 $ 14.3
- -------------------------------------------------------------
In 1997 the company recognized a $5.7 million pension curtailment loss as
part of restructuring charges. This curtailment arose from plant
rationalization initiatives as well as the sale of the company's garage related
products business.
39
The funded status of the company's defined benefit plans at the end of
each fiscal year was as follows:
(Millions of Dollars) 1997 1996
- ------------------------------------------------------------------------
Plans Plans Plans Plans
Where Where Where Where
Assets Accumulated Assets Accumulated
Exceed Benefits Exceed Benefits
Accumulated Exceed Accumulated Exceed
Benefits Assets Benefits Assets
- ------------------------------------------------------------------------
Actuarial present value
of benefit obligations:
Vested $ 326.5 $ 12.9 $ 351.4 $ 13.3
Non-vested 40.1 6.7 6.0 2.7
- ------------------------------------------------------------------------
Accumulated
benefit obligation 366.6 19.6 357.4 16.0
Additional amounts
related to projected
pay increases 72.5 6.1 69.6 6.8
- ------------------------------------------------------------------------
Total projected benefit
obligation (PBO) 439.1 25.7 427.0 22.8
Plan assets at fair value 518.5 7.1 463.1 7.1
- ------------------------------------------------------------------------
Assets in excess of
(less than) PBO 79.4 (18.6) 36.1 (15.7)
Unrecognized net
(gain) or loss at
transition (4.7) .1 (6.5) .1
Unrecognized net
(gain) or loss (61.9) 2.6 (16.4) 4.2
Unrecognized prior
service cost 8.2 5.8 11.3 2.7
Adjustment required to
recognize minimum
liability - (4.2) - (2.5)
- ------------------------------------------------------------------------
Prepaid (accrued)
pension expense $ 21.0 $ (14.3) $ 24.5 $(11.2)
- ------------------------------------------------------------------------
Assumptions used for significant defined benefit plans were as follows:
1997 1996 1995
- -------------------------------------------------------
Discount rate 7.0% 7.0% 7.0%
Average wage increase 4.5% 4.5% 4.5%
Long-term rate of return
on assets 9.0% 9.0% 9.0%
- -------------------------------------------------------
POSTRETIREMENT BENEFITS
The company provides medical and dental benefits for certain retired
employees in the United States. In addition, domestic employees who retire from
active service are eligible for life insurance benefits.
The status of the company's plans at the end of each fiscal year was as
follows:
(Millions of Dollars) 1997 1996
- --------------------------------------------------------------
Accumulated postretirement benefit obligation:
Retirees $11.5 $13.3
Fully eligible active plan participants 1.9 1.8
Other active plan participants 4.1 3.1
- --------------------------------------------------------------
17.5 18.2
Unrecognized net loss (1.9) (2.0)
- --------------------------------------------------------------
Accrued postretirement benefit expense $15.6 $16.2
- --------------------------------------------------------------
Net periodic postretirement benefit expense was $1.9 million in 1997, $2.0
million in 1996 and $2.9 million in 1995.
The weighted average annual assumed rate of increase in the per-capita
cost of covered benefits (i.e. health care cost trend rate) is assumed to be 9%
for 1998 reducing gradually to 6% by 2010 and remaining at that level
thereafter. A one percentage point increase in the assumed health care cost
trend rate would have increased the accumulated benefit obligation by $.9
million at January 3, 1998 and net periodic postretirement benefit expense for
fiscal year 1997 by $.1 million. A weighted average discount rate of 7% was
used in measuring the accumulated benefit obligations in both 1997 and 1996.
L. OTHER COSTS AND EXPENSES
Interest-net for 1997, 1996 and 1995 included interest income of $8.1
million, $5.5 million and $5.3 million, respectively.
Other-net in 1997 includes a non-cash charge of $10.6 million ($.07 per
share), representing the difference between the exercise price and the fair
market value of a 1,000,000 share option grant under terms of the company's
employment contract with its chief executive officer. This contract resulted in
a 1996 charge of $7.6 million ($.08 per share) for the issuance of 200,000
common stock equivalent share units and other immediately vested benefits.
Advertising costs are expensed as incurred and amounted to $48.2 million
in 1997, $52.5 million in 1996 and $54.3 million in 1995.
40
M. RESTRUCTURING AND ASSET WRITE-OFFS
In 1997, the company announced a restructuring initiative to streamline
its manufacturing, sales, distribution and administration operations, reducing
its overall cost structure. The company will reduce manufacturing and
distribution facilities locations from 123 to 70. Many of the closures will be
effected by consolidating operations into other company facilities, others by
outsourcing work to vendors. In addition, the company reorganized its
operations into a product management structure, in which eight product groups
will be focusing on customers and sales growth through development of new
products and expanding market shares. In support of this structure,
manufacturing, engineering, sales and service, finance, human resource and
information technology functions will be centralized. The implementation of
these restructuring initiatives will also result in additional transition
costs, which are expected to be incurred through mid-1999. In 1997,
restructuring and asset write-off charges of $238.5 million included the
write-down of assets ($73.6 million), severance for the termination of
approximately 8,900 employees ($139.3 million), other exit costs ($32.2
million) and gains on the divestiture of two businesses ($6.6 million).
Pursuant to this restructuring plan, the company terminated 892 employees in
1997. Severance and other exit payments of $14.2 million were made during the
year. At January 3, 1998, reserve balances related to the 1997 restructuring
activities were $201.0 million, of which $40.9 million relate to the write-down
of impaired assets.
In 1996, the company recorded restructuring and asset write-off charges of
$47.8 million for the write-down of assets, severance for approximately 695
employees and other costs associated with a previous restructuring initiative
announced in fiscal 1995. Such costs and asset write-offs were primarily
related to transfers of production among existing manufacturing facilities,
plant closures and resulting workforce reductions ($35.4 million), and
impairment of assets related to restructuring initiatives and strategy changes
($9.4 million). The company also divested five businesses during 1996 and
recognized an associated net loss of $3.0 million which was included in 1996
restructuring charges.
In 1995, restructuring and asset write-off charges of $85.5 million
included the write-off of assets, severance for approximately 900 employees and
other costs. Such costs and asset write-offs were primarily related to exiting
three product categories, closing six manufacturing plants, three distribution
centers and two support facilities ($53.4 million), and impairment of assets
related to restructuring initiatives and strategy changes ($20.7 million).
Restructuring charges also included $5.3 million for severance related to a
workforce reduction and $6.1 million for a comprehensive SKU reduction program.
The 1996 and 1995 restructuring initiatives are nearing completion. During
1997 and 1996, payments of $13.7 million and $17.9 million, respectively, were
made for severance and other exit costs. At January 3, 1998, the reserve
balance for these initiatives was $7.2 million, and is expected to be utilized
by the end of 1998.
41
N. OPERATIONS BY INDUSTRY SEGMENT
AND GEOGRAPHIC AREA
Industry Segment and Geographic Area information included on page 19 of
this report is an integral part of the financial statements.
O. INCOME TAXES
Significant components of the company's deferred tax liabilities and
assets as of the end of each fiscal year were as follows:
(Millions of Dollars) 1997 1996 1995
- ------------------------------------------------------------
Deferred tax liabilities:
Depreciation $ 74.3 $ 78.6 $ 75.4
Other 2.0 10.1 12.9
Total deferred tax liabilities 76.3 88.7 88.3
- ------------------------------------------------------------
Deferred tax assets:
Employee benefit plans 36.5 23.8 19.8
Doubtful accounts 9.7 6.7 5.1
Inventories 5.0 5.4 5.6
Amortization of intangibles 22.8 24.4 15.1
Accruals 18.3 18.6 18.0
Restructuring charges 71.1 15.1 19.2
Other - 6.1 1.7
Total deferred tax assets 163.4 100.1 84.5
- ------------------------------------------------------------
Net deferred tax
assets (liabilities) $ 87.1 $ 11.4 $ (3.8)
- ------------------------------------------------------------
Income tax expense consisted of the following:
(Millions of Dollars) 1997 1996 1995
- ------------------------------------------------------
Current:
Federal $48.5 $ 49.4 $ 26.0
Foreign 28.7 19.5 21.1
State 8.8 12.6 7.5
Total current 86.0 81.5 54.6
- ------------------------------------------------------
Deferred (benefit):
Federal (36.9) 2.0 1.2
Foreign (21.6) (3.7) .3
State (4.2) (2.5) (2.4)
Total deferred (benefit) (62.7) (4.2) (0.9)
- ------------------------------------------------------
Total $ 23.3 $ 77.3 $ 53.7
- ------------------------------------------------------
Income taxes paid during 1997, 1996 and 1995 were $69.1 million, $64.4
million and $74.1 million, respectively.
The reconciliation of the federal income tax at the statutory federal rate
to the income tax at the effective rate was as follows:
(Millions of Dollars) 1997 1996 1995
- ---------------------------------------------------
Tax at statutory rate $ (6.5) $ 61.0 $ 39.5
State income taxes,
net of federal benefits 3.8 6.9 5.5
Difference between foreign
and federal income tax 1.9 .7 1.4
Restructuring reserves 24.3 7.1 8.0
Other-net (.2) 1.6 (.7)
- ---------------------------------------------------
Income taxes $ 23.3 $ 77.3 $ 53.7
- ---------------------------------------------------
The components of earnings (loss) before income taxes consisted of the
following:
(Millions of Dollars) 1997 1996 1995
- --------------------------------------------------------
United States $ 11.1 $ 156.6 $ 78.5
Foreign (29.7) 17.6 34.3
- --------------------------------------------------------
Total pretax earnings (loss) $(18.6) $ 174.2 $ 112.8
- --------------------------------------------------------
Undistributed foreign earnings of $169.5 million at January 3, 1998 are
considered to be invested indefinitely or will be remitted substantially free
of additional tax. Accordingly, no provision has been made for taxes that might
be payable upon remittance of such earnings, nor is it practicable to determine
the amount of this liability.
P. LEASES
The company leases certain facilities, vehicles, machinery and equipment
under long-term operating leases with varying terms and expiration dates.
Future minimum lease payments under noncancelable operating leases, in
millions of dollars, as of January 3, 1998 were $22.4 in 1998, $18.3 in 1999,
$15.2 in 2000, $11.1 in 2001, $7.3 in 2002 and $29.5 thereafter. Minimum
payments have not been reduced by minimum sublease rentals of $15.7 million due
in the future under noncancelable subleases. Rental expense for operating
leases amounted to $34.9 million in 1997, $36.6 million in 1996 and $40.3
million in 1995.
42
Q. CONTINGENCIES
In the normal course of business, the company is involved in various
lawsuits and claims. In addition, the company is a party to a number of
proceedings before federal and state regulatory agencies relating to
environmental remediation. Also, the company, along with many other companies,
has been named as a potentially responsible party (PRP) in a number of
administrative proceedings for the remediation of various waste sites,
including nine Superfund sites. Current laws potentially impose joint and
several liability upon each PRP. In assessing its potential liability at these
sites, the company has considered the following: the solvency of the other
PRPs, whether responsibility is being disputed, the terms of existing
agreements, experience at similar sites, and the fact that the company's
volumetric contribution at these sites is relatively small.
The company's policy is to accrue environmental investigatory and
remediation costs for identified sites when it is probable that a liability has
been incurred and the amount of loss can be reasonably estimated. The amount of
liability recorded is based on an evaluation of currently available facts with
respect to each individual site and includes such factors as existing
technology, presently enacted laws and regulations, and prior experience in
remediation of contaminated sites. The liabilities recorded do not take into
account any claims for recoveries from insurance or third parties. As
assessments and remediation progress at individual sites, the amounts recorded
are reviewed periodically and adjusted to reflect additional technical and
legal information that becomes available. As of January 3, 1998, the company
had reserves of $31.9 million, primarily for remediation activities associated
with company-owned properties as well as for Superfund sites.
The amount recorded for identified contingent liabilities is based on
estimates. Amounts recorded are reviewed periodically and adjusted to reflect
additional technical and legal information that becomes available. Actual costs
to be incurred in future periods may vary from the estimates, given the
inherent uncertainties in evaluating certain exposures. Subject to the
imprecision in estimating future contingent liability costs, the company does
not expect that any sum it may have to pay in connection with these matters in
excess of the amounts recorded will have a materially adverse effect on its
financial position, results of operations or liquidity.
QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
(Millions of Dollars, except per share amounts) Quarter Year
- -----------------------------------------------------------------------------------------------------------------------
1997 First Second Third Fourth
- -----------------------------------------------------------------------------------------------------------------------
Net sales $ 646.6 $ 673.6 $ 650.5 $ 698.8 $2,669.5
Gross profit 215.2 227.5 213.9 229.5 886.1
Selling, general and administrative expenses 153.2 153.8 148.2 172.5 627.7
Restructuring and asset write-offs (4.6) 137.2 105.9 - 238.5
Net earnings (loss) $ 36.7 $ (64.5) $ (40.6) $ 26.5 $ (41.9)
Net earnings (loss) per share:
Basic $ .41 $ (.72) $ (.46) $ .30 $ (.47)
Diluted $ .41 $ (.72) $ (.46) $ .29 $ (.47)
- -----------------------------------------------------------------------------------------------------------------------
1996
Net sales $ 635.3 $ 677.2 $ 672.9 $ 685.4 $2,670.8
Gross profit 206.0 224.2 224.5 220.6 875.3
Selling, general and administrative expenses 149.0 153.1 151.7 154.7 608.5
Restructuring and asset write-offs - 3.8 3.1 40.9 47.8
Net earnings (loss) $ 29.6 $ 32.6 $ 37.7 $ (3.0) $ 96.9
Net earnings (loss) per share:
Basic $ .33 $ .37 $ .42 $ (.03) $ 1.09
Diluted $ .33 $ .36 $ .42 $ (.03) $ 1.08
- -----------------------------------------------------------------------------------------------------------------------
Note: The second quarter of 1997 includes a charge of $10.6 million, or $.07
per share, for a stock option grant as specified in the company's employment
contract with its chief executive officer. The fourth quarter of 1996 includes
a charge of $7.6 million, or $.08 per share, for other elements of this
contract.
43
CORPORATE INFORMATION
- -------------------------------------------------------------------------------
BOARD OF DIRECTORS
John M. Trani 1
Chairman and
Chief Executive Officer
The Stanley Works
Mannie L. Jackson 2, 5
Chairman
Harlem Globetrotters International, a division of MJA, Inc.
Hugo E. Uyterhoeven 3, 4
Professor, Graduate School
of Business Administration
Harvard University
Stillman B. Brown 1, 4, 5
Managing General Partner Harcott Associates
Investments
James G. Kaiser 2, 5
Retired; former President
and Chief Executive Officer Quanterra Incorporated,
a subsidiary of Corning Incorporated and
International Technology Inc.
Walter W. Williams 3, 5
Retired; former Chairman
and Chief Executive Officer
Rubbermaid, Incorporated
Edgar R. Fiedler 3, 4
Retired; former
Vice President and
Economic Counselor
The Conference Board
Eileen S. Kraus 1, 2, 4
Chairman, Connecticut
Fleet National Bank
Kathryn D. Wriston 1, 2, 3
Director of various
organizations
CORPORATE OFFICERS
JOHN A. COSENTINO, JR.
Vice President, Operations
(1997)
WILLIAM D. HILL
Vice President, Engineering and Technology
(1997)
KENNETH O. LEWIS
Vice President, Marketing and Brand Development
(1997)
MARK J. MATHIEU
Vice President, Human Resources
(1997)
THOMAS E. MAHONEY
President, Consumer Sales Americas
(1965)
PAUL W. RUSSO
Vice President, Strategy and Development
(1995)
JOHN M. TRANI
Chairman and Chief Executive Officer
(1997)
STEPHEN S. WEDDLE
Vice President, General Counsel and Secretary
(1978)
THERESA F. YERKES
Vice President and Controller
(1989)
(Joined Stanley)
1 Member of the Executive Committee
2 Member of the Audit Committee
3 Member of the Board Affairs and Public Policy Committee
4 Member of the Finance and Pension Committee
5 Member of the Compensation and Organization Committee
44
INVESTOR AND SHAREOWNER INFORMATION
COMMON STOCK
- -------------------------------------------------------------------------------
The Stanley Works common stock is listed on the New York and Pacific Stock
Exchanges under the abbreviated ticker symbol "SWK."
Stock (Dollars per Share)
- ----------------------------------------------------------------------------
Price Dividends
- ----------------------------------------------------------------------------
1997 1996 1997 1996
- ----------------------------------------------------------------------------
High Low High Low
First Quarter 41 28 28 5/8 24 1/16 $.185 $.18
Second Quarter 44 3/8 35 1/2 32 13/16 27 1/8 .185 .18
Third Quarter 47 3/8 39 1/4 30 3/4 23 5/8 .20 .185
Fourth Quarter 47 3/16 39 15/16 30 1/2 26 3/8 .20 .185
- ----------------------------------------------------------------------------
$.77 $.73
- ----------------------------------------------------------------------------
DIVIDENDS
The Stanley Works has an impressive and truly unique dividend record over the
long haul:
o Our record of annual dividend payments is unmatched by any industrial
company listed on the New York Stock Exchange-- 121 consecutive years.
o Our quarterly dividend record is the longest of any industrial company
listed on the New York Stock Exchange-- 411 consecutive quarters.
o We have increased dividends in each of the past 30 years,
and in that same period, an investment in Stanley stock grew at a compound
annual rate of 14.4%.
INCREASED DIVIDENDS EVERY YEAR SINCE 1968
Dividend per share in Dollars $.77 per share
[GRAPIC LINE CHART SHOWING INCREASED DIVIDENDS EVERY YEAR SINCE 1968]
TRANSFER AGENT AND REGISTRAR
All shareowner inquiries, including transfer-related matters, should be
directed to:
Boston EquiServe, Servicing Agent for
State Street Bank and Trust Company
P.O. Box 8200
Boston, MA 02266-8200
800-426-5523
CORPORATE OFFICES
The company's principal corporate offices are located at:
1000 Stanley Drive, New Britain,
Connecticut 06053.
Telephone 860-225-5111.
ANNUAL MEETING
The annual shareowners' meeting of The Stanley Works will be held at 9:30 a.m.
on Wednesday, April 15, 1998, in New Britain, Connecticut at the Stanley
Center, 1255 Corbin Avenue. A formal notice of the meeting together with a
proxy statement has been mailed to shareowners with this annual report.
INDEPENDENT AUDITORS
Ernst & Young LLP, 225 Asylum Street,
Hartford, Connecticut 06103
FINANCIAL & INVESTOR COMMUNICATIONS
The Stanley Works investor relations department provides information to
shareowners and the financial community. We encourage inquiries and will provide
services which include:
o fulfilling requests for annual reports, proxy statements, form 10-Q, form
10-K, copies of press releases and other company information.
o meetings with securities analysts and fund managers.
Contact The Stanley Works investor relations department at our corporate
offices by calling Gerard J. Gould, Director, Investor Relations at (860)
827-3833. We make quarterly news releases available on-line on the Internet on
the day that results are released to the news media. The Stanley Works releases
will be found at the following address on the World Wide Web:
http://www.prnewswire.com. Click on "Company News On-Call." Shareowners may
also visit our Internet home page at: http://www.stanleyworks.com. Stanley
shareowners are also able to call toll-free 800-499-9202 to request a copy of
the most recent quarterly release.
[PHOTOGRAPH OF JOHN M. TRANI AND THE DIRECTORS AT THE NEW YORK STOCK EXCHANGE]
In recognition of Stanley's outstanding dividend record, including its 30th
consecutive annual dividend increase, the New York Stock Exchange invited
John M. Trani, Chairman and Chief Executive Officer, to ring the opening bell
on July 18, 1997.
Use of (R) or (TM) in this annual report indicates trademarks owned by The
Stanley Works and its subsidiaries except that Coca-Cola(R) is a registered
trademark of the Coca-Cola Company.
45